Comment Text:
i0-001
COMMENT
CL-02035
From:
Sent:
To:
Subject:
Benjamin Segal
Thursday, January 21, 2010 5:43 PM
secretary
Regulation of Retail Forex
To whom it may concern:
I am a college student majoring in math and economics, and a retail
foreign exchange trader. I focus on a time horizon of about 6 months,
and make trading decisions based on fundamental economic analysis. I
have always believed and argued to others that 100:1 leverage is far too
high in essentially all circumstances. I do not oppose a decrease in the
maximum leverage ratio for retail foreign exchange to around 50:1, but I
believe the current proposal to limit leverage to 10:1 excessive, and
would have a number of negative consequences, even for traders like me
who would never want to use even 50:1 leverage, let alone 100:1.
Currently my foreign exchange leverage is only about 12.5:1, and that is
about where I want it to be. However, since I make my trading decisions
based the analysis of economic fundamentals, it sometimes happens that
in the short run, the market moves against my positions even as my
analysis stays the same or becomes still more convincing. At such times
I tend to allow my use of leverage to increase, because I believe that
short term market volatility is often only noise which will be of little
consequence over my time horizon.
However, while on average a maximum leverage ratio of 10:1 would force
me to decrease my position sizes only slightly, at times of increased
volatility such a maximum would likely cause unnecessary margin calls
that would force me to exit my positions just when I believe the market
is behaving least rationally. Fear of such a contingency would thus
cause me to reduce my leverage far below even the 10:1 limit, allowing
me to take on less than the optimal amount of risk given my risk
preferences.
More generally, it is important to recognize that any decrease in the
maximum leverage ratio is likely to have a similar effect for many
medium and long term traders, and thus the effective maximum leverage
ratio for many foreign exchange traders will be significantly lower than
the actual rule. Even considering this, I think a maximum leverage ratio
not less than 50:1 would not be unreasonable, and would have the added
benefit of protecting, somewhat, those uninformed traders who do
regularly use close to 100:1 margin, but a maximum much lower than that
would have too many negative side-effects for traders like me.
Sincerely,
Benjamin Segal
